The Hong Kong Monetary Authority (HKMA), Hong Kong’s de-facto central bank, left its base rate charged through the overnight discount window unchanged at 5.75%, tracking action by the U.S. Federal Reserve. The latest move kept borrowing costs in the city to the highest level since January 2008. Hong Kong raises rates in line with the Fed due to the Hong Kong Dollar’s peg to the US Dollar. Immediately after the announcement the Hong Kong’s one-month interbank offered rate (Hibor) soared to 5.24 per cent yesterday, 75 basis points higher than a month earlier. The three-month Hibor climbed 28 basis points during the same period to 5.22 per cent.
“The financial and monetary markets of Hong Kong continue to operate in a smooth and orderly manner,” HKMA said, adding the Hong Kong dollar exchange rate remains stable and the Hong Kong dollar interbank rates might remain high for some time.”
Hong Kong Monetary Authority CEO Eddie Yue Wai-man did not meet the media on Thursday.
“The public should carefully assess and manage the relevant risks when making property purchase, mortgage or other borrowing decisions,” the HKMA said in a statement after its decision to keep the base rate unchanged.
“The Fed stressed that its future interest rate decisions would continue to be dependent on the latest economic data and the impact of continual rate hikes during the past year on the economy,” the monetary authority said. “It is therefore premature to conclude whether the US rate hike cycle has been completed, and the high interest rate environment is likely to last for some time.”
Hong Kong’s benchmark Hang Seng Index fell 1 per cent to trade at 17,683 at 10:30am following the interest rate decision, and after Wall Street stocks’ retreat overnight the US S&P 500 dropped 1 per cent and Nasdaq fell 1.5 per cent.
Defending the Peg
The HKMA move came after rounds of intervention by the HKMA to defend the Hong Kong dollar bumping into the weakest end of the peg at 7.85.
Persistent intervention by the HKMA had failed to put a floor under the Hong Kong dollar and interbank rates, as investment inflows from mainland China and a weak domestic economy have sapped loan demand.
Hong Kong’s aggregate balance, a gauge of liquidity levels in the banking system, has declined rapidly over the past year, and is down more than 90% from its peak in 2021. It fell to just 44.76 billion Hong Kong dollars ($5.7 billion) by Monday ahead of last months meeting, the lowest level since November 2008.
Since last May, the currency has touched 7.85, the weak end of the band over 40 times, prompting the HKMA to buy nearly 289 billion Hong Kong dollars ($37 billion) from banks to shore up its value, according to statistics released by the authority early last month.
The slump started in early 2021, when there was a decline in the flow of investments from mainland China into Hong Kong stocks as Beijing cracked down on the country’s internet giants and education companies, many of which are listed in the city. In the last 18 months, US interest rates have been the main driver for the pressure on Hong Kong’s currency.
John Greenwood who is credited as the chief architect of Hong Kong’s dollar peg after an article he wrote in 1983 provided the basis for the system, said ditching the peg would hurt the city’s role as an international financial center.
“A large proportion of Asia’s trade and capital transactions are still denominated in US dollars,” he told CNN. “Pegging the Hong Kong dollar to the US dollar encourages such transactions to be carried out in Hong Kong and under Hong Kong law, even if neither party is based in Hong Kong.”On converting to the Yuan he said; “Hong Kong would not be able to operate a system that was fully and freely convertible to the mainland [currency] without undermining some of China’s financial controls,” Greenwood said.
Hong Kong Property Market Pressures
Hong Kong is already struggling after Beijing’s crackdown on technology and private education firms back in July, and then the debt crisis at mainland Chinese developer China Evergrande Group. In an already precarious situation with the Chinese property market implosion higher rates have helped drive Hong Kong’s property market into a rare downturn, prices of residential properties and rent for office space also collapsed.
While Hong Kong’s official base rate follows the Fed’s policy rate, banks are not obliged to remain in lock-step with U.S. rates, especially when they see ample liquidity cushion in the system.
Seven lenders, including Hong Kong’s three currency note issuers. HSBC, Standard Chartered Bank, and Bank of China (Hong Kong) raised their mortgage rates by 50 basis points earlier this week.
That put the effective cost of mortgages among the banks, with 80 per cent of Hong Kong’s loans, at 4.125 per cent after discounts from their prime rates.
China Construction Bank (Asia) raised the borrowing rate for its best customers by 1.5 percentage point to 5.125 per cent today, according to mReferral. The bank has 0.3 per cent of Hong Kong’s mortgage market.
The end of dividend flows from Hong Kong-listed Chinese companies after August loosened Hong Kong dollar liquidity conditions.
The Fed’s aggressive monetary tightening this year has raised concerns about Hong Kong’s linked exchange rate system, including its sustainability and relevance. Just last month, American investor Bill Ackman who founded hedge fund Pershing Square Capital Management, said that the mechanism no longer made sense for the city. He placed a monstrous bet for it to fail shorting the Hong Kong dollar.
The Hong Kong Monetary Authority however has said that it does not need or intend to change the system, citing strong buffers and deep liquidity in the banking system.
From The TradersCommunity Research Desk